john k. paglia - pepperdine graziadio business school · john k. paglia, ph.d., cfa, cpa • about...

2011 Economic Forecast February 22, 2011

John K. Paglia, Ph.D., CFA, CPA

•  About the respondents •  2011 economic forecast •  Creating jobs in 2011 •  Impediments to US GDP Growth in 2011 •  Impact of US and foreign monetary policy on GDP •  Growth confidence in US GDP and business growth •  Incentives to innovate •  Allocation of economic stimulus •  Value of US dollar and business financial health •  Investing in US and abroad •  Extending the US debt limit

Outline

•  1,224 participants from privately-held businesses, private capital providers, investment bankers, business appraisers, and business service providers affiliated with privately-held companies

•  Responses collected from January 1 – January 11, 2011 •  84% from U.S. (West 32%, Midwest 13%, South 18%, Northeast

21%); 16% International •  35% capital providers, 17% business owners; 18%

intermediaries, 11% business appraisers, 19% business service providers (accountants, consultants, attorneys, etc.)

•  64% are managing director or C-level employees; 19% VPs; 12% manager or analyst; 5% other

•  45% have revenues or AUM under $5 million; 30% from $5 million to $100 million; 15% from $100 million to $1 billion; 10% greater than $1 billion

About the Respondents

Economic Forecast by Location of Respondent

Fourth Quarter to Fourth Quarter (Percentage change)or at December 31, 2011 where indicated

WholeSample

SampleSegmentsNonU.S.based

U.S.based West Midwest South Northeast

2011USGDP 2.0% 1.7% 2.1% 1.7% 2.2% 2.2% 2.3%

2012USGDP 2.5% 2.2% 2.5% 2.2% 2.8% 2.6% 2.7%

USUnemploymentRate(12/31/2011) 9.1% 9.1% 9.1% 9.2% 9.0% 9.1% 9.1%

Inflation(CPI) 2.1% 1.9% 2.2% 2.3% 2.3% 2.0% 2.0%

10-yearTreasuryNote(12/31/2011) 3.8% 3.6% 3.8% 3.7% 4.0% 3.8% 3.9%

USHousing(2011) -1.8% -0.2% -2.0% -2.7% -1.6% -2.3% -0.9%

S&P500(2011) 6.5% 7.3% 6.3% 5.1% 7.1% 6.4% 7.4%

ProbabilityofUSrecession(2011) 28.4% 31.2% 28.0% 30.5% 25.6% 26.6% 27.5%

PrimeRate(12/31/2011) 3.8% 3.7% 3.8% 3.8% 3.8% 3.8% 3.8%

Economic Forecast by Type and Size of Respondent

Fourth Quarter to Fourth Quarter (Percentage change)or at December 31, 2011 where indicated

WholeSample

SampleSegments

BusinessOwners

PrivateEquityAngel/VC Lenders

Intermediaries

<$5million

$5-$100M

>100million

2011USGDP 2.0% 1.8% 2.3% 2.1% 2.0% 2.2% 1.9% 2.1% 2.1%

2012USGDP 2.5% 2.4% 2.6% 2.5% 2.3% 2.6% 2.4% 2.6% 2.5%

ProbabilityofUSrecession(2011) 28.4% 30.6% 26.2% 26.1% 28.6% 28.8% 30.4% 27.6% 27.3%

Inflation(CPI,2011) 2.1% 2.3% 2.0% 1.8% 2.1% 2.2% 2.2% 2.1% 2.1%

10-yearTreasuryNote(12/31/2011) 3.8% 3.7% 3.8% 3.8% 3.9% 3.8% 3.7% 3.8% 3.8%

PrimeRate(12/31/2011) 3.8% 3.8% 3.8% 3.8% 3.6% 3.8% 3.8% 3.7% 3.8%

USUnemploymentRate(12/31/2011) 9.1% 9.2% 9.1% 8.9% 9.2% 9.1% 9.1% 9.1% 9.2%

USHousing(2011) -1.8% -2.4% -1.8% -1.7% -1.0% -1.4% -2.3% -1.5% -1.1%

S&P500(2011) 6.5% 5.5% 7.0% 6.8% 5.9% 7.2% 6.1% 6.7% 6.7%

Economic Forecast Comparison to Financial Institutions

Fourth Quarter to Fourth Quarter (Percentage change)or at December 31, 2011 where indicated

WholeSample

WhiteHouse

FederalReserve CBO WallStreet

Consensus NABE

2011USGDP 2.0% 3.1% 3.7% 3.1% 3.3% 3.3%

2012USGDP 2.5% 4.0% 3.9% 2.8% 3.2% 3.4%

USUnemploymentRate(12/31/2011) 9.1% 9.1% 8.9% 9.2% 8.8% 9.0%

Inflation(CPI2011) 2.1% 1.4% 1.5% 1.3% 1.9% 1.8%

10-yearTreasuryNote(12/31/2011) 3.8% 3.6% n/a 3.6% 4.0% 3.9%

USHousing(2011) -1.8% n/a n/a n/a -0.1% 0.4%

S&P500(2011) 6.5% n/a n/a n/a 10.0% 7.3%

ProbabilityofUSRecession(2011) 28.4% n/a n/a n/a 13.0% n/a

PrimeRate(12/31/2011) 3.8% n/a n/a n/a 3.3% n/a

Distribution of participants’ projections for the change in real GDP, 2011–13 and over

the longer run

0.4% 0.3% 1.0%1.5%

4.3%

18.4%

21.1%19.2%

12.7%

7.8%

5.1%

2.2% 2.5%1.3% 0.7% 0.3% 1.0% 0.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Averageis3.75%

Government Policies to Lead to Job Creation

16.3%

22.9%31.7%

1.9%19.7%

Regulatoryreform

Taxincentives

Increasedaccesstocapital

Educationreform

Increasedcompetitivenesswithforeigntradepartners

Wholesample

BusinessOwners

Entiresegment

<$5million

$5-$100million

$100million-$1billion >$1billion

Increasedaccesstocapital 35% 44% 35% 31% 30% 17%

Taxincentives 20% 19% 20% 24% 24% 30%

Regulatoryreform 17% 14% 17% 15% 17% 20%

Increasedcompetitivenesswithforeigntradepartners 17% 14% 17% 22% 21% 24%

Educationreform 2% 0% 2% 1% 3% 4%

Other 10% 9% 10% 8% 5% 5%

Government Policies to Lead to Job Creation (Segmented)

Will U.S. publicly-traded or U.S. privately-held companies create more jobs in 2011?

17.5%

69.7%

12.8%

Publicly-tradedcompanies

Privately-heldcompanies

Bothwillcreateapproximatelythesamenumberofjobs

The Year when the U.S. unemployment rate first reaches 6% or below

0.6%

4.9%

23.3%25.0%

20.4%

11.0%

3.8% 3.8%

0.7% 0.9%

5.6%

0%

5%

10%

15%

20%

25%

30%

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 After2020

The Number One Impediment to U.S. GDP growth in the next 12 months

Mostinfluential Least

influential Score(1to4)

1 2 3 4Uncertaineconomicenvironment/lowdemand 35% 31% 22% 11% 2.9

Governmentregulations(tax,healthcare) 26% 24% 26% 25% 2.5

Limitedaccesstocapital 23% 19% 24% 32% 2.3

Globalpoliticalandeconomicenvironment 17% 26% 29% 32% 2.3

The Number One Impediment to U.S. GDP growth in the next 12 months by Segment?

WholeSample

BusinessOwners

Entiresegment

<$5Million

$5-$100Million

$100million-$1billion

>$1billion

Uncertaineconomicenvironment/lowdemand 35% 26% 33% 33% 40% 42%

Governmentregulations(tax,healthcare) 26% 26% 26% 26% 27% 26%

Limitedaccesstocapital 23% 32% 28% 22% 17% 13%

Globalpoliticalandeconomicenvironment 16% 17% 14% 18% 16% 19%

Impact the U.S. monetary policy will have on U.S. GDP in the next 12 months?

9.0%

41.6%24.6%

18.2%6.6%

Positive

Somewhatpositive

Neutral

Somewhatnegative

Negative

Impact the foreign monetary policy will have on U.S. GDP in the next 12 months?

2.9%21.8%

31.0%

37.5%

6.8%Positive

Somewhatpositive

Neutral

Somewhatnegative

Negative

©2011PepperdineUniversity.AllRightReserved.

Confidence in U.S. economic growth compared to one year ago?

16.4%

51.6%

18.3%

9.3% 4.5%Moreconfident

Somewhatmoreconfident

Neutral

Somewhatlessconfident

Lessconfident

Confidence in growth prospects for U.S. privately-held businesses that are recipients of your investment or

your firm's (or fund's) capital compared to one year ago?

20.0%

56.0%

18.0%

3.5%2.5% Moreconfident

Somewhatmoreconfident

Neutral

Somewhatlessconfident

Lessconfident

The incentive for U.S. privately-held businesses to innovate today compared to

one year ago?

10.9%

28.4%

38.8%

13.5%8.4%

Moreincentivized

Somewhatmoreincentivized

Neutral

Somewhatlessincentivized

Lessincentivized

Companies that have benefited more from the economic stimulus measures put forth

over the past year in the U.S.

64.0%

7.6%

14.6%13.7%

Publicly-tradedcompanies

Privately-heldcompanies

Bothhavebenefitedequally

Neitherhavebenefitted

Has the economic stimulus measures put forth to benefit businesses in the U.S. over the past year been fairly

distributed between publicly-traded and privately-held companies?

19.4% 9.1%71.5%

Yes

No.Publicly-tradedcompanieshavereceivedlessthanafairallocationNo.Privately-heldcompanieshavereceivedlessthanafairallocation

A.EntireSample

10.6% 9.1%

80.3%

Yes

No.Publicly-tradedcompanieshavereceivedlessthanafairallocationNo.Privately-heldcompanieshavereceivedlessthanafairallocation

B.BusinessOwners

Has the economic stimulus measures put forth to benefit businesses in the U.S. over the past year been fairly

distributed between publicly-traded and privately-held companies? (Segmented by size)

19.4% 9.1%71.5%

Yes

No.Publicly-tradedcompanieshavereceivedlessthanafairallocationNo.Privately-heldcompanieshavereceivedlessthanafairallocation

C.EntireSample

15.5%8.4%

76.1%

Yes

No.Publicly-tradedcompanieshavereceivedlessthanafairallocationNo.Privately-heldcompanieshavereceivedlessthanafairallocation

D.Size<$5million

20.2% 8.8%71.0%

Yes

No.Publicly-tradedcompanieshavereceivedlessthanafairallocationNo.Privately-heldcompanieshavereceivedlessthanafairallocation

E.$5million-$100million

26.1%

11.5%62.5%

Yes

No.Publicly-tradedcompanieshavereceivedlessthanafairallocation

No.Privately-heldcompanieshavereceivedlessthanafairallocation

F.Morethan$100million

With regard to the value of the U.S. dollar (relative to other currencies), which do you believe would be more

beneficial to the financial health of U.S. privately-held businesses in 2011?

35.3%

39.1%

25.6%

StrongerU.S.dollar

WeakerU.S.dollar

Indifferent.Idon'tbelieveeitherwouldmakeasignificantdifference

A.WholeSample

40.5%

31.3%

28.2%

StrongerU.S.dollar

WeakerU.S.dollar

Indifferent.Idon'tbelieveeitherwouldmakeasignificantdifference

B.BusinessOwners

With regard to the value of the U.S. dollar (relative to other currencies), which do you believe would be more beneficial to the financial health of U.S. privately-held

businesses in 2011? (Segmented by size)

35.3%

39.1%

25.6%

StrongerU.S.dollarWeakerU.S.dollarIndifferent.Idon'tbelieveeitherwouldmakeasignificantdifference

C.WholeSample

36.7%

35.5%

27.8%

StrongerU.S.dollar

WeakerU.S.dollar

Indifferent.Idon'tbelieveeitherwouldmakeasignificantdifference

D.<$5Million

35.4%

39.9%

24.7%

StrongerU.S.dollarWeakerU.S.dollarIndifferent.Idon'tbelieveeitherwouldmakeasignificantdifference

E.$5-$100Million

31.8%

43.4%

24.7%

StrongerU.S.dollarWeakerU.S.dollarIndifferent.Idon'tbelieveeitherwouldmakeasignificantdifference

F.$100millionplus

Geographic areas more or less likely to be invested in today as compared to one year

ago?

Lesslikely Somewhatlesslikely Neutral Somewhat

morelikelyMorelikely Score(1to5)

UnitedStates 5% 7% 30% 37% 20% 3.6

Brazil 9% 7% 38% 33% 14% 3.35

India 9% 6% 41% 33% 12% 3.32

Canada 6% 7% 47% 31% 9% 3.31

Australia 8% 7% 54% 25% 7% 3.18

China 11% 14% 38% 26% 12% 3.13

Japan 15% 17% 56% 10% 2% 2.67

EuropeanUnion 17% 22% 44% 14% 3% 2.66

Mexico 22% 18% 44% 14% 3% 2.58

Russia 21% 20% 46% 9% 4% 2.55

Geographic areas more or less likely to be invested in today as compared to one year

ago? (Non-US Based Only) Lesslikely Somewhat

lesslikely Neutral SomewhatmorelikelyMorelikely Score

(1to5)

India 5% 7% 25% 38% 25% 3.72

Brazil 5% 5% 31% 38% 21% 3.64

China 8% 11% 30% 33% 18% 3.42

Canada 7% 6% 48% 31% 8% 3.28

Australia 8% 10% 44% 25% 14% 3.26

UnitedStates 13% 16% 38% 24% 9% 2.99

Mexico 12% 18% 40% 25% 6% 2.97

Russia 12% 22% 36% 21% 9% 2.94

EuropeanUnion 13% 23% 34% 24% 7% 2.9

Japan 16% 24% 48% 10% 2% 2.59

Geographic areas more or less likely to be invested in today as compared to one year

ago? (US Based Only)

Lesslikely Somewhatlesslikely Neutral Somewhat

morelikely Morelikely Score(1to5)

UnitedStates 4% 5% 28% 41% 22% 3.72

Canada 6% 7% 48% 31% 9% 3.32Brazil 10% 7% 39% 32% 12% 3.29India 10% 6% 43% 32% 9% 3.25Australia 7% 6% 55% 25% 6% 3.16China 12% 14% 39% 24% 11% 3.08Japan 15% 16% 57% 10% 2% 2.69EuropeanUnion 17% 21% 47% 12% 2% 2.61Mexico 24% 18% 45% 12% 2% 2.5Russia 22% 20% 49% 7% 3% 2.49

Would an increase in the $14.3 trillion U.S. debt limit be beneficial or detrimental to

U.S. businesses in 2011?

6.4%15.0%

18.8%

29.3%

30.4%

Beneficial

Somewhatbeneficial

Neutral

Somewhatdetrimental

Detrimental

John K. Paglia, Ph.D., CFA, CPA Associate Professor of Finance

Senior Researcher, Pepperdine Private Capital Markets Project

bschool.pepperdine.edu/privatecapital john.paglia@pepperdine.edu

Thank you!